On the Grid

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“They want a price cut. It creates some confusion in the market, really,” said Charlie Herrman, CCL's vice president for sales and marketing.

The reality of the aluminum pricing market is complex.

The base price for aluminum ingot that Alcoa Inc. and others produce, set by the London Metal Exchange, is about $1,897 per metric ton, down from a 25-year high of about $3,100 in June 2008. But premiums paid in addition to the exchange price are at record highs, analysts say.

The premium — based on warehouse inventory levels, time in storage and transportation costs, and settled by metals analyst Platts — is negotiated quarterly by suppliers and buyers.

It has led to some turmoil.

Brewer MillerCoors LLC, for example, says higher premiums added $3 billion, or an estimated 3.3 cents per can, to its aluminum costs in the past year.

Premiums soared because of “record queues” in dominant London exchange warehouses, said Jorge Vazquez, managing director at Harbor Aluminum Intelligence, a commodities consultant in Austin.

In the Midwest, the premium adds as much as $275 per ton to manufacturers' costs, a cost that ultimately is passed on to consumers, experts said.

CCL Container uses about 24,000 tons of aluminum, making 560 million bottles annually. That equates to a premium of about 1.2 cents per bottle.

CCL Container and competitor Exal Corp. of Youngstown, Ohio, are the nation's largest makers of aluminum aerosol bottles. Exal claims the larger share of the 1.1 billion bottles sold each year.

Exal, which employs about 450 people, was founded by entrepreneur Delfin Gibert in 1993, helping the onetime steel city's recovery. Now CEO Mike Hoffman hopes Congress, lawsuits or regulatory changes will fix the pricing situation.

“We're all very upset about this situation,” Hoffman said. “It has to change; it's not sustainable.”

‘Artificially driven'

Since 2010, Wall Street banks — mainly JPMorgan Chase & Co. and Goldman Sachs Group Inc. — have pushed up premiums for aluminum, making an unprecedented financial bet against the most-used of London Metal Exchange-traded industrial metals, analysts say.

The banks acquired scores of London-approved metals warehouses in the United States and Europe.

“(The price is) artificially driven, because there's thousands of tons of aluminum in these warehouses,” Hoffman said. With storage costs the banks charge, the longer it takes to move aluminum out, “the more money they make.”

The London exchange operates more than 700 warehouses worldwide.

“Coincidentally, when Goldman Sachs and JPMorgan got into the warehouse business, the Midwest premium started to skyrocket,” said CCL Container's Herrman. “Now it's 10 percent to 14 percent of our aluminum cost; it used to be 3 percent to 5 percent.”

Goldman Sachs in 2010 purchased Metro International Trade Services, which owns one of the largest warehouse complexes. In recent weeks, it began offering immediate access to aluminum for end users holding metal in its Metro warehouses, said spokesman Mike DuVally.

Any delivery backlogs resulted from client orders and were not caused by Goldman or Metro, he said.

“We also note that aluminum prices are down 40 percent from their peak,” DuVally said.

JPMorgan, which owns warehouses through its Henry Bath & Sons Ltd., said it is considering a sale, spin-off or strategic partnership of its physical commodities business.

The London exchange “can take the appropriate steps on its own to address the market-distorting warehousing practices of its members,” said Chris Thorne, a spokesman for the Beer Institute, which represents MillerCoors and 2,800 other breweries. “But if (it) chooses not to end these unfair practices, then we will continue to work with lawmakers, regulators and others to fix the problem.”

It is not yet clear whether the uproar is having an effect.

London exchange figures show aluminum inflows are at the lowest rate in months, about 6,027 metric tons for August. So operators may be reducing backlogs, experts said.

The average inflow for the preceding 12 months was 11,867, but monthly figures are volatile.

‘Economic anomaly'

The situation has forced companies to close aluminum refineries and lay off workers.

Alcoa has said it intends to idle 16 percent of its smelting capacity because of falling prices and a supply glut.

At the congressional hearing, Tim Weiner, global risk manager for commodity metals at MillerCoors, testified that London exchange rules enable unfair practices. He said legislators and regulators, including the Federal Reserve, should strengthen oversight of bank holding companies that form “an economic anomaly in the aluminum markets.”

Weiner said Goldman Sachs controls 29 of 37 warehouses in Detroit, which house about 25 percent of aluminum stored in the exchange worldwide and more than 70 percent of aluminum in North America.

The banks slowed deliveries from warehouses to ensure they receive increased rent for an extended period, he said, causing users such as MillerCoors to wait for as long as 18 months. Warehouses take in tens of thousands of metric tons a day and release no more than 3,000, he said.

“Just imagine a warehouse with a big garage door marked ‘in' and the small front door of your house marked ‘out,' ” Weiner said. “It has cost MillerCoors tens of millions of dollars in excess premiums over the last several years, with no end in sight.”

‘Lack of trust'

The London exchange said on July 1 that it is consulting with warehouse users on a proposal to cut delivery backlogs. Its board is scheduled to decide in October whether to implement changes.

The London exchange, Alcoa said, “does not provide the same quality of information and level of transparency as required by other commodities exchanges, such as those falling under the scope of the U.S. Commodity Futures Trading Commission.”

On Alcoa's website, CEO Klaus Kleinfeld warns: “The outcome of price determination that is not transparent is eventual lack of trust. People will look for alternatives.”

At least six class-action lawsuits have been filed against Goldman Sachs, JPMorgan and other warehouse operators, charging that they artificially inflated aluminum premiums and disrupted supplies.

Goldman's DuVally said the lawsuits are without merit. JPMorgan spokesman Brian Marchiony said the bank “doesn't have queues at its warehouses, period.”

The Commodities Futures Trading Commission reportedly has issued subpoenas to companies that store and deliver aluminum. A commission spokesman declined to comment.

John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or joravecz@tribweb.com.

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